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How are demand drafts processed and settled?

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In India, a Demand Draft is a cheque that contains an order of one branch of a bank ( Drawer branch ) directing another branch of the same bank (Drawee branch ) to pay on demand a certain sum of money to a specified beneficiary ( Payee ) . It is an Account payee instrument, meaning it can only be credited to the account of the payee and cannot be encashed over the counter by the payee.
A Demand Draft is a much safer and certain method of payment than cheques, since in the case of cheques, an individual is the drawer and hence the cheque can be dishonoured by the drawee bank due to insufficiency of funds in the drawer's account. But since in the case of a DD, the drawer is a bank, payment is certain and it cannot be dishonoured.
Universities require payment of application fee to be done through a secure means, like a DD. In this case, the student would apply to his bank to get a DD issued favouring Delhi University. Suppose the student resides in Mumbai. Suppose he holds an account in a particular branch of SBI in Mumbai. In this case, this particular SBI branch in Mumbai would be the Drawer branch, a SBI branch located in Delhi ( typically the Service Branch ) would be the Drawee branch and Delhi University would be the payee.
Since it is a cheque issued by a bank ( that is, drawer is a bank ) it does not carry the signatures of the customer, unlike the case of ordinary cheques which carry the signature of the customer ( who is the drawer ). Instead, a DD carries signatures of one or two bank officials, depending on the DD amount. Usually the DD will carry the name/code of the Drawee branch and of the Issuing ( Drawer ) branch both. The placements of this varies from bank to bank.
Pay Orders, also called Local DDs or Bankers' cheques, are cheques where the drawer and the drawee branch is the same. These are used for local payments ( that is, payments within a city )
An applicant for a Demand Draft is required to fill in a DD Request Slip, mentioning the amount, payee's name, issuing branch, location the draft should be payable at, his name, signature and account number etc. In most cases, the purchaser of the draft is an account holder with the bank, hence he can authorise the bank to debit ( that is, take out funds from ) his account either through a Cheque or a debit mandate. The Cheque should be drawn in favour of " Yourself for the issue of DD favouring XYZ ", where XYZ refers to the payee of the DD.
The bank levies charges for the DD, in the form of a commission. Hence the customer has to pay an amount equal to ( DD amount + Commission + Service Tax ).
DDs can also be issued against the payment of cash by the purchaser, but in this case, the total amount ( inclusive of commission and taxes ) should not exceed Rs. 49,999.
Since a DD is kind of a cheque, the principle of Cheque Clearing also applies to DDs. In the example mentioned above, if the payee, Delhi University does not hold an account with SBI, but with another bank,say PNB, it would deposit the cheque in its PNB branch and the PNB officials would lodge the DD in outward clearing. ( The DD would be sent to the local Clearing House )